We didn’t start the FIRE: The true history of financial independence

I used to be a collector. I collected trading cards. I collected comic books. I collected pins and stickers and mementos of all sorts. I had boxes of things I'd collected but which essentially served no purpose.

I can't say I've shaken the urge to collect entirely, but I have a much better handle on it than I used to. A few years ago, I sold my comic collection and stopped obsessing over them. Today, I collect three things: patches from the countries I visit, pins from national parks, and -- especially -- old books about money.

Collecting old money books is fun. For one, it ties to my work. Plus, there's not a huge demand for money manuals, so there's not a lot of competition to buy them. (Exception: As much as I'd love a copy of Ben Franklin's The Way to Wealth, so would a lot of other people. That one is out of my reach.)

One big bonus from collecting old money books is actually reading these books. They're fascinating. And it's interesting to trace the development of certain ideas in the world of personal finance.

For instance, there's this persistent myth of "lost economic virtue". That is, a lot of people today want to argue that people were better at managing their money in the past. They weren't. Debt (and poor money skills) has been a persistent problem since well before the United States was founded. It's not like we, as a society, once had smart money skills and lost them. The way people manage money today is the way they've always managed money.

Or there's the notion of financial independence (and the closely-related topic of early retirement). The standard narrative goes something like this:

When you read old money books, however, you soon realize that FIRE isn't new. These ideas have been kicking around for a while. Sure, the past decade has seen the systemization and codification of the concepts, but people have been preaching the importance of financial independence for about 150 years. Maybe longer.

Today, using my collection of old money books, let's take a look at where the notion of financial independence originated.

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Introducing “Morning Musings”

Update! I've had a couple of people email to ask if I plan to host these videos here on the blog. The short answer is "no". The long answer is "maybe eventually". But I realized that I could make it easy on folks by embedding the Morning Musings playlist at the top of this article. So, here it is. In theory, this should get updated whenever I post a new video. This is an embedded playlist, and the most recent video should appear at the top. (In theory.)

For years now, I've wanted to start a Get Rich Slowly channel on YouTube.

Well, I guess that's only partially correct. I have a GRS channel on YouTube; it's just not very active. So, I guess what I mean to say is that I want to have an active GRS channel on YouTube.

There are lots of barriers, though, all of which are purely mental. I worry about how I look. I worry about how I sound. I worry about production quality. I worry about the amount of time this will all take. Basically, I'm paralyzed by the need to be perfect.

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Action creates motivation

Human beings are interesting creatures. I'm fascinated by them. That's probably the reason I was a psychology major in college. It's certainly the reason that I believe (strongly) that everybody is talented, original, and has something important to say. (That bit of philosophy is something I picked up from Brenda Ueland's marvelous book, If You Want to Write.)

People are awesome — even if we're each flawed in our own way.

One thing I've noticed over the past few years is the dichotomy between knowing something and doing something. It's one thing to understand a concept or fact intellectually; it's a completely different thing to experience a fact or concept, or to put it into practice.

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I am the one thing in life I can control

Three weeks ago, I drove from Portland to Colorado Springs to participate in Camp FI, a weekend retreat for people interested in financial independence and early retirement.

Under normal circumstances, I wouldn't drive this distance. It's a 1300-mile trip that takes at least twenty hours to cover. Or, if you're me, it's a 1400-mile trip that takes 23 hours of driving spread over two days.

But, in case you haven't noticed, we're in the middle of a global pandemic, and although I'm not nearly as cautious as many of my friends, I don't relish the idea of confining myself to close quarters with dozens of strangers for hours on end in an airplane. Besides, I like to drive. And I love the beauty of the American west. And I needed some time alone to think deep thoughts — and to listen to the Hamilton soundtrack over and over and over again.

Around noon on Day Two, as I exited I-80 in south-central Wyoming, I was listening to Hamilton for the fourth time in 24 hours when I was smacked in the brain by a lyric I hadn't heard before. I pulled off the side of the road to think about it -- and to make some notes.

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Great lessons from great men

Because I write a personal finance blog, I read a lot of books about money. I'll be honest: they're usually pretty boring. Sure, they can tell you how to invest in bonds or how to find the latest loophole in the tax code. But most of them lack a certain something: the human element.

Over the years, I've found that it's fun to read a different kind of money book in my spare time. I've discovered the joy of classic biographies and success manuals, especially those written by (or about) wealthy and/or successful men. When I read about Benjamin Franklin or Booker T. Washington or J.C. Penney, I learn a lot — not just about money, but about how to be a better person.

Here are some of the most important lessons that these books, written by and about great men of years gone by, have taught me.

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What is a robo-advisor? An introduction to automated investment tools

One of the joys of writing a money blog like Get Rich Slowly is the continuing self-education. I'm always reading and learning about personal finance. A lot of the times -- as in the past month -- this education is about esoteric topics. I'm currently diving deep into the history of personal finance, a subject that's interesting to me but admittedly not of much practical use in the modern world. (Today in the mail, I got a book about advertising and the use of credit during the 1920s. How's that for esoteric?)

But sometimes, this self-education does have practical uses, and it's stuff that I can share with you folks so that you too can become better educated.

For instance, I have a huge blind spot when it comes to so-called "robo-advisors". When I stopped writing here in 2012, robo-advisors existed but they hadn't yet become a Big Deal. By the time I re-purchased this site in 2017, things had changed. Robo-advisors had become a major force in the investment industry -- and I was clueless about what they were.

I've remained (mostly) clueless for almost three years now. I have a general idea of what robo-advisors are and how they operate, but only in the broadest sense. During our weekly planning call on Monday, I mentioned this blind spot to my business partner, Tom.

"You should write about robo-advisors," Tom said. "If you don't know what they are, I'll bet there are plenty of readers who don't know either. Do some research, write it up, and then everybody benefits."

Tom is a smart man.

Here then is my research into the world of robo-advisors. What are they? How do they work? And who should use them? Let's find out.

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“Saving rate” vs. “savings rate” — What’s the difference?

Those who know me well will tell you that I'm something of a pedant. I'm not proud of it.

Left to my own devices, I'm one of those who'd go around correcting everybody's grammar. It grates on my nerves when people mangle their usage of "me" and "I", for instance. (It's never okay to say, "She gave that to my wife and I." And you can't make "I" possessive: "My wife and I's house is big." Blarg!)

That said, I've learned to let things go in my old age.

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GRS Insider #92: Racism is not a political issue. Racism is a MORAL issue.

Yesterday, as I do most Fridays, I sent the GRS Insider to folks who subscribe to the Get Rich Slowly email list.

The email was unusual. It was more like a blog post than a simple summary of recent articles. I've had several people request a version they can share with other people, so -- this one time only -- I've created a stand-alone web version.

Parts of this have been edited slightly to account for the transition from email to web.

If you've been reading me for any length of time — or if you know me in person — you know that I hate conflict. I hate hate hate it. Some people seem to thrive on it. Not me. I shirk from it.

This is one reason I've steadfastly kept my financial writing politically neutral. I don't want conflict.

It helps that I'm neither liberal nor conservative. I'm some strange mix of the two. But mostly it's because I think financial advice is important for everyone regardless of political persuasion. It's rare that I take a stand on something political.

Because of who I am and what I believe, Get Rich Slowly will never become a political platform. (It'll touch on politics occasionally, but politics will never be a driving force at the site.)

That said, I'm mad as hell about not only the recent bout of racism in the U.S., but also the long history of racism that underpins our society. Something's gotta give. The current protests are 100% justified and they're not acts of terrorism. They're a call for action. What sort of action? I have no idea. I don't have solutions. But the problem is plain as day and it must be addressed. We, as a nation, must — at long last — deal with our history instead of sweeping it under the rug.

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Who invented the index fund? A brief (true) history of index funds

Pop quiz! If I asked you, "Who invented the index fund?" what would your answer be? I'll bet most of you don't know and don't care. But those who do care would probably answer, "John Bogle, founder of The Vanguard Group." And that's what I would have answered too until a few weeks ago.

But, it turns out, this answer is false.

Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the "common sense" investment answer for the average person. For this, he deserves much praise.

But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!

John Bogle did not invent index funds

Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a "secret history" of which I'd been completely unaware.

In this article, I've done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I'm sure I've made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)

Here then, is a brief history of index funds.

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What’s the best long-term investment?

What's the best long-term investment? Because you're a money nerd (and a GRS reader), I hope your answer to this question was, "Stocks!" If the future is anything like the past, that's the correct answer. History has shown that stocks are the best long-term investment -- and by a wide margin.

Unfortunately, most Americans believe otherwise.

As a part of its annual Economy and Personal Finance survey (conducted during the first two weeks of April), Gallup News asked 1017 American adults, "Which of the following do you think is the best long-term investment: bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold?"

Here's how people answered:

  • 35% of respondents said that real estate is the best-long term investment
  • 21% said that stocks or mutual funds are the best long-term investment
  • 17% said that savings accounts or certificates of deposit are the best long-term investment
  • 16% said gold is the best long-term investment
  • 8% said bonds are the best long-term investment

Americans' views on the best long-term investment

While acknowledging that past results are no guarantee of future performance -- let's take a look at why I think Americans haven't got a clue when it comes to figuring out the best long-term investment strategy.

The Rate of Return on Everything

The August 2019 issue of The Quarterly Journal of Economics included a paper entitled "The Rate of Return on Everything, 1870-2015". Over an astounding 74 pages of discussion, the authors attempt to analyze the long-term (145-year) rate of return on a variety of assets around the world.

The paper examines four popular investment vehicles:

  • Bills, by which the authors mean Treasury bills, are short-term government bonds. At present, these are a good proxy for the rates you can earn with a high-yield savings account. (I don't think this is always the case, though.)
  • Bonds, which in this case refers to ten-year government bonds (such as a 10-year Treasury note).
  • Equity, which is another way to describe common stock. Here, the authors are measuring overall stock market performance.
  • Housing, including rental properties.

We'll look at each of these in greater detail in a moment (and we'll look at gold too), but for now let's look at this paper's overall findings. While the authors looked at data for many countries, I'm only going to share results for the U.S. The following table shows the rates of return for these different asset classes over three different time periods. (Remember that, for our purposes, Bills are a stand-in for savings accounts.)

Long-term returns on certain asset classes

From this table, it's clear that equities (i.e., stocks) have been the highest return investments over long periods of time. Nothing else comes close. (Outside the U.S., this isn't always true.)

Now, while stocks provide the best long-term returns, they also come with the greatest volatility. Here's a a chart (Figure VII) from the paper that shows just how crazy the ride with stocks can be. (Also note how closely equities and real estate tracked each other until the Great Depression.)

Equity returns vs. real-estate returns

It's this volatility that scares so many people away from the stock market. They're afraid that a sharp decline can come at any time. And that's true. But what's also true is that a prolonged bull market can occur at anytime, as we experienced from March 2009 to February 2020! If you're a long-term investor, you don't give a fig about short-term market movement.

Let's dive deeper into the long-term investment returns provided by the asset classes in the Gallup poll: real estate, stocks, savings accounts, gold, and bonds.

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